What is the Difference Between a REIT and a DST?

Introduction

When it comes to investing in real estate, there are various options available to investors. Two popular investment vehicles in the real estate sector are Real Estate Investment Trusts (REITs) and Delaware Statutory Trusts (DSTs). While both offer opportunities to invest in real estate, there are key differences between the two that investors should understand before making a decision.

REIT

A Real Estate Investment Trust, commonly known as a REIT, is a company that owns, operates, or finances income-generating real estate. The primary objective of a REIT is to generate income for its investors through rental income, property sales, or mortgage interest. REITs are typically publicly traded on stock exchanges, allowing investors to buy shares and become part owners of the underlying real estate assets.

One of the key advantages of investing in a REIT is the potentially high dividend yield. REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends, which can make them attractive to income-seeking investors. Additionally, investing in a REIT provides investors with a diversified portfolio of real estate assets, as most REITs own multiple properties across different sectors.

DST

A Delaware Statutory Trust, or DST, is a legal entity that allows multiple investors to own fractional interests in real estate properties. Unlike REITs, which are publicly traded, DSTs are private offerings that are typically sold through private placement offerings. DSTs are commonly used for 1031 exchanges, a tax-deferment strategy that allows investors to defer capital gains taxes on the sale of investment property by reinvesting the proceeds into a like-kind property.

One of the primary advantages of investing in a DST is the potential for passive income. The income generated by the underlying real estate properties is distributed to DST investors on a pro-rata basis, providing a steady stream of income. Furthermore, DST investments often focus on specific property types, such as commercial properties or multi-family residential properties, allowing investors to target their investments according to their preferences.

Differences Between REITs and DSTs

While both REITs and DSTs offer opportunities to invest in real estate, there are several key differences between the two:

Liquidity

REITs are publicly traded on stock exchanges, which means that investors can easily buy or sell shares at any time during market hours. This liquidity provides investors with flexibility, allowing them to adjust their investment positions as needed. On the other hand, DSTs are illiquid investments, as they are privately held and have limited secondary markets. Investors in DSTs typically have limited options to sell their interests, and the process can be more time-consuming compared to selling REIT shares.

Minimum Investment

REITs generally have a lower minimum investment requirement, making them more accessible to a wider range of investors. Investors can purchase REIT shares with relatively small amounts of capital. In contrast, DSTs typically require higher minimum investments, as they are designed for accredited investors who meet certain income or net worth thresholds.

Management and Control

Investing in a REIT means becoming a shareholder and having limited control over the management and decision-making processes. The REIT’s management team is responsible for the day-to-day operations and strategic decisions. In contrast, DST investors have a more passive role as they own fractional interests in the property, and a professional asset manager typically handles the management and decision-making processes.

Tax Considerations

REITs are subject to corporate taxes, but they can avoid double taxation by distributing at least 90% of their taxable income to shareholders in the form of dividends. Shareholders then report these dividends as taxable income on their personal tax returns. On the other hand, DSTs are typically structured in a way that allows investors to pass through the income and tax benefits directly to individual investors, potentially reducing the overall tax burden.

Conclusion

Both REITs and DSTs offer opportunities for individuals to invest in real estate. REITs provide liquidity, diversification, and potentially high dividend yields, while DSTs offer passive income potential and the ability to target specific property types. Understanding the differences between these investment options is crucial for investors to make informed decisions based on their investment goals, risk tolerance, and tax considerations.

Frequently Asked Questions

1. Can I invest in both REITs and DSTs?

Yes, investors can allocate their investment capital to both REITs and DSTs. Diversifying across different real estate investment options can help spread the risk and potentially enhance returns.

2. Are there any limitations on who can invest in REITs and DSTs?

While REITs are accessible to a wider range of investors, DSTs typically require investors to be accredited, meeting specific income or net worth thresholds. Accredited investors have a higher level of financial sophistication and are deemed to have a lower risk profile.

3. How often are dividends distributed in REITs?

REITs are required by law to distribute at least 90% of their taxable income to shareholders annually. Dividends are generally distributed quarterly or monthly, but the frequency can vary across different REITs.

4. Can I perform a 1031 exchange with a REIT?

No, a 1031 exchange can only be performed with like-kind properties, not with shares of a REIT. However, investing in a DST can be a suitable option for investors looking to pursue a 1031 exchange.

5. What are the risks associated with investing in REITs and DSTs?

As with any investment, there are risks involved. REITs and DSTs are subject to market risks, such as fluctuations in real estate values and changes in interest rates. Additionally, individual REITs and DSTs may have their own specific risks, such as property-specific risks or management risks. It is essential for investors to thoroughly research and analyze each investment opportunity before making a decision.